U.S. Q2 GDP should show the economy has slowed to well below potential, supporting our QE3 call, while the ECB's loan survey will give a timely update on euro area credit conditions.

For the U.S.: 1) Waning business confidence will continue to weigh on hiring and investment; 2) Ample economic slack and lower energy prices should reduce inflation and risk heightening concerns about deflation; 3) We see the FOMC providing further stimulus (likely QE) in response to fading economic growth and greater downside risks; 4) Europe’s debt crisis and the looming US “fiscal cliff” should continue to weigh on growth through the rest of 2012; 5) We expect policymakers to act after the election to avert the effects of severe fiscal tightening scheduled to begin in 2013.

For Europe: 1) Pro-cyclical fiscal tightening, financial deleveraging and overly tight monetary policy is pushing the eurozone to recession; 2) After July’ rate cut, we expect the ECB to cut the refi rate by 25bp again in August with risks skewed towards less and later; 3) We assume that the eurozone crisis will escalate and further increase pressure on the ECB: ultimately we expect QE; 4) Before Q4 2012, we see Portugal getting a second financing package without a PSI operation being set as a pre-requisite; 5) Headwinds, especially from the euro area, will likely keep the UK on the brink of recession until the Olympics arrive in Q3; 6) We expect inflation to settle close to target in the UK but in the euro area to remain above 2% for most of 2012; and 7) The BoE extended liquidity and funding support before announcing £50bn of QE in July. We expect £25bn more in November.